Oil rush as Mexico reforms energy market


June 15, 2015

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It is always tough re-building an energy market. Just ask Mexico.

Next month (15 July), the Mexican government is set to auction the rights to search for oil in 14 areas in the Gulf of Mexico. This is the first auction since the government opened up the country’s energy market to private investors last year, after 76 years in state control.

The auction has attracted major interest from multinational oil and gas companies, with the government pre-qualifying bidders such as Chevron, ExxonMobil and Marathon.

It shows that the country’s energy reforms are starting to have an effect, and Mexico’s leaders are expecting $62.5bn of foreign investment in the energy market over the next three years. But this dash for fossil fuels contrasts with its approach to renewables.

It was only last year that president Enrique Pena Nieto said there would be no limitations on inbound investment in renewable energy, which piqued the interest of the wind sector.

But Mexico has not followed up by giving clear direction on the future of renewables auctions, incentives or annual targets. This lack of clarity is itself proving a limitation.

Investors need certainty, but such certainty is hard to come by in a period of major change. As a result, we expect slow growth in wind to continue. It would be unrealistic to think Mexico would have new mechanisms in place to support fast growth in the wind sector; but it is also unrealistic for Mexico’s leaders to expect fast growth in wind without that support.

One of the problems for Mexico is that we are judging it against its own ambitious targets. It has committed to growing wind capacity from 2.6GW in 2014 to 9.5GW in 2018, which is unlikely given that the energy market is going through significant changes.

Meeting such a target would require 1.7GW of installations a year, whereas 634MW was added in 31 wind farms in 2014 and around 700MW is expected in 2015. We expect growth to continue at this slower level until more support is put in place for wind investors.

If this support is put in place then its long-term prospects look good.

Mexico has strong winds in the states of Baja California, Oaxaca and Tamulipas; and companies such as Invenergy and SunEdison are looking to join Spanish companies Acciona, Gamesa and Iberdrola in the market. We see no shortage of wind players in North America and South America that would see Mexico as an attractive market for them to expand into.

But this is heavily reliant on the government, which has to make good on its commitment to wind and other renewables, even if it does not think they are as cheap as oil and gas. It must maintain that renewables are important in the country’s energy mix.

The big danger we see is the government getting swept up in the enthusiasm for fossil fuels and sidelining renewables. We need only look at the market’s excitement last week when Mexican state-run utility Pemex revealed it had found an oil reserve in the Gulf of Mexico that is believed to hold 350million barrels of crude oil.

Wind needs backing from the government, even if it does little that is quite so head-turning.

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